Revenue’s annual report outlines some of potential international tax changes coming our way

Revenue published its 2021 annual report on 11 May giving an overview of the past year. It weighs in at over 100 pages. Its press release notes that Revenue collected total gross receipts of almost €96.6 billion, including €17.5 billion in non-Exchequer receipts collected on behalf of other Government Departments, Agencies and EU Member States. Net Exchequer receipts of €67.5 billion were up by 20% or €11.3 billion on 2020. This was in addition to Revenue playing its role in the delivery of Government supports to businesses as part of the national response to Covid-19, when Revenue effectively went from tax taker to cash maker, while still keeping compliance front and centre.

In addition, significant work was done last year on the international tax agenda. The report notes that program “…is rapidly evolving and complex. In 2021, we [Revenue] worked closely with the Department of Finance, OECD, European Commission and Council groups in the EU to develop global and EU tax policy on a broad range of international tax and duty matters”. This is an area which can only continue to evolve. We know that Ecofin failed to agree recently on the implementation of the OECD Pillar 2 directive. Executive Vice-President Dombrovskis noted in his related press release he hoped that agreement would be possible at the next Ecofin which is on 24 May. That is not beyond doubt given certain country objections such that more debate may be necessary.

The challenge of international tax was recognised by the IMF recently in its Staff Concluding Statement of the 2022 Article IV Mission on Ireland. It noted that its “Staff welcomes the planned medium-term fiscal strategy given that public debt is above 100 percent of GNI* and in view of the remaining uncertainties about changes in international corporate income tax (CIT) rules.”

I mention this here because the Revenue’s response to the Commission on Taxation (published on same webpage as annual report) makes reference to its objectives in this area. It notes that these changes in the taxation of corporate income, “including the 15% minimum rate [Pillar 2] and the reallocation of profits to market jurisdictions, will need to be carefully integrated into the current structure. They will have a significant impact on where multinational enterprises pay tax and how much they pay in each jurisdiction. The complexity of these global changes and the speed at which they are being introduced will present challenges for taxpayers and tax administrations alike. The increasing reliance on financial accounting data under the new measures will offer opportunities for enhanced reporting systems and for automatic exchange of tax returns between relevant tax administrations”.

The submission continues further referencing OECD’s tax initiatives noting that “…while the detailed rules for implementing the partial reallocation of multinational enterprise (MNE) profits to market jurisdictions are not yet agreed, it is envisaged that an MNE will file a single tax return with a single lead tax administration, for onward transmission to the tax administrations of the market jurisdictions that will become entitled to a portion of its consolidated global profits. We envisage that, in keeping with our vision for future tax administration, the principles set out in this submission for a taxpayer-centric model of tax administration, underpinned by highly efficient digital data interchange, will also apply where possible in the implementation of the new international tax arrangements”.

You can see how big a deal this will be for everyone involved and Revenue’s involvement in, as Jean Baptise Colbert said, ‘plucking the goose with the least possible amount of hissing’, will be critical. This is recognised in its submission. In particular, Revenue specifically notes that to deliver these fundamental changes successfully, that it would:

• liaise closely with the Department of Finance to support the development of the necessary legislation to fully implement EU and international agreements;
• pursue substantial mitigation of the additional compliance burdens, and greater certainty, for taxpayers;
• develop efficient digital data interfaces, supported to the greatest extent possible by integration with enterprises’ ‘natural’ accounting systems, to minimise the impact of additional reporting requirements; and
• provide clear guidance to taxpayers on the operation of the new rules.
  

The above is critical if these international measures come about. Simplicity of application eats complexity for breakfast. If all countries have to implement similar regimes then differences between countries becomes part of the investment decision. In particular, guidance on the operation of new rules is essential. We’ve done this before. Last year we brought about a corporate interest restriction which is highly complex legislation and came about by reference to the EU directive implementing certain OECD proposals. The nutshell version is that companies’ cost of finance will be limited to 30% of its Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). That doesn’t come close to demonstrating the complexity of the near 30 pages of legislation required. The level of consultation on that issue was significant and it looks like that will continue. That’s a good thing given consultation reduces consternation or hissing.

Accompanying Revenue’s annual report is its corporate taxes document. There is some commentary on the issue of “close companies”. In a nutshell, a ‘close company’ is one that’s controlled by five or fewer “participators” (together with their associates, i.e., relatives etc.), or any number of participators (and their associates) who are directors. A participator is, broadly speaking, any person with a share or interest in the capital or income of the respective company. “Close-ers” can comprise owner-managed companies.

Revenue’s document points out that in 2020 there were over 140,000 of such companies and about 8,000 of them paid surcharges on undistributed income of almost €50 million on top of their usual tax bills. Interestingly, the number of such companies was up on the previous year, related corporation tax bills was down (presumably because of reduced trading, losses etc) but surcharges were up on the previous year. They arose because these companies might not have made make certain pay-outs to shareholders. Had they done so then the cash that “left the building” would not have been available to reinvest in the business and the surcharge was the price paid. Revenue made certain concessions around such surcharges with Covid-19. However, with inflation running as it is right now then this is one area that should be looked at in this year’s Budgetary process as a means of allowing cash to be reinvested in business. Budget 2023 isn’t that far away.
 

Please note this article first featured in the Business Post on Sunday 22 May and was re-published kindly with their permission on our website.